When it’s better to do nothing

Dateline: Tbilisi, Georgia

I had an interesting conversation with one of my lawyers in the United States last night. He and I have several mutual friends and our conversations are always interesting outside of the legal aspects discussed.

Yesterday, however, our mission was specific: we were reviewing a contract related to a project one of my team members is working on, and the lawyer had some issues with it.

“It looks like the type of contract should got off of a template website”, he said, referring to what the other side sent to me to sign.

The truth is, I believe that the other party did indeed go to some “create a contract for $9” website, print out a template, fill in the blanks, and send the resulting document my way. And I don’t blame them. For years, the do-it-yourself legal industry has spent a fortune – including on radio stations I used to consult back in the day – promoting their cheaper approach to legal services.

Here’s the problem: cheaper is rarely better.

My lawyer found three sections of the do-it-yourself contract that were either nonsensical or potentially harmful. Section by section, he explained why this contract not only wasn’t serving me, but could open the door to problems in the future.

You might dismiss this as a lawyer trying to make things more complicated than needbe, but his resolution was far from complicated. His suggested resolution was that I barely needed a contract at all, and that while there may some case where it would help, the downside of having nothing signed was likely to be zero.

As someone who likes to cross the “T”‘s and dot the “I”‘s, I’m glad I sought my lawyer’s advice on this issue. Paying for an hour or two of his time to review the document and issue an opinion is well worth the cost just in terms of peace of mind, let alone any legal benefits.

I’m a big believer in consulting experts and paying for advice to save hassle and expense later. In this case, however, the expert’s ruling was that not much expertise was needed. It reminded me that many of us in business are so used to things being complicated that we train ourselves to seek out complication where none necessarily exists. We assume that we need 92-page contracts when something one step above some scribbles on a napkin would accomplish the same goal.

And it reminded me that, in the Nomad Capitalist world of going offshore and keeping more of your own money, sometimes less is more, also.

My lawyer explained one case where a client had signed a lengthy contract with an employee that he thought would protect his rights, when in reality it opened loopholes for the employee to exploit after they quit. My lawyer was called in to clean up the mess, and it didn’t sound cheap.

In the same way, I recently spoke to a guy – we’ll call him Bob – who had set up two different offshore companies – one owned by the other – in traditional tax havens in an attempt to reduce his taxes from selling books online.

Bob went to great trouble and spent a lot of time thinking about whether to set up shop in Malta or the British Virgin Islands, and eventually decided on both. He talked to service providers in both places who told him how easy it would be to pay “zero tax” on his book sales.

It turns out, as we often discuss, that the people in Malta and BVI have no clue what royalty taxes exist on book sales in the United States, nor about tax residency rules for the person who owns those companies.

To make a long story short, Bob ended up paying a lot of money to set up his two company structure that ended up costing him about 5% in ADDITIONAL taxes than he would have paid by simply selling in his own name.

Imagine going to so much effort only to discover you would have been better off doing nothing. It was very disheartening for Bob, who did what so many other people I see do when it comes to going offshore: Research. Think. Prevaricate. Chase shiny objects. In the end, none of these things lead to any kind of results.

Just as my lawyer said I could actually be at a disadvantage signing a lengthy, nonsensical contract, Bob is actually at a disadvantage having wasted countless hours of time and a lot of money only to end up with a worse result.

I’ve also seen other cases where people worked with disbarred lawyers who gave them bad advice and cost them a lot of money as well as potential liability with the government.

While I’m a big believer in the idea of “imperfect action over perfect inaction”, your finances and taxes are nothing to slack on. And sometimes the best solution is the most simple on. Sadly, many offshore service providers try to upsell you as many trusts, companies, and other junk you don’t need to rack up their upfront fee as well as the annual fees they charge you to keep your complicated structure in place. In my experience, this is a waste and could be avoided with proper planning.

Now, this is not to say that you shouldn’t move your company offshore or follow any of the other tenets we talk about here at Nomad Capitalist. It can still make a lot of sense to set up an offshore company, but you need a plan to do it the right way.

While location-independent businesses are a great fit for moving offshore, other businesses that are tied to one location won’t typically see any benefit from shifting their operations overseas. On occasion, they could actually suffer worse treatment by doing so.

Do-it-yourself legal services might have someplace for basic contracts between parties that don’t expect many problems. However, if you have any kind of significant assets – be it cash, a business, or a brand – it’s better to get professional advice.

The same is true of the offshore world. Service providers offering to set up your offshore company for the price of a pizza, and with only the information you filled out on a one-page form, will never understand your real needs, and working with them blindly could cause more problems than having done nothing at all.